Law: Income Tax Act, 1922

Section: 10,10(2)(xy)

Indian Income Tax Act, 1922(XI of 1922)---Section 10(2)(xy)-Business expenditure-Penalty-Distinction-between business expenditure and penalty-Assessee agreeing to export certain quantity of cloth or in case of short export to pay certain amount on quantity of short export-Amount paid by assessee for short export-Whether business expenditure-Held yes-Principles of Commercial expendiency explained. By a bond executed by the assessee company in favour of the Government, in consideration of the Government having permitted the assessee-mill to use the trade mark "sanforized" on the cloth sanforized by it during the period from July 1, 1963, to December 31, 1972, the assessee-company agreed to export to certain foreign; countries, either in the form of cloth itself or in the form of ready-made-garments, 10 per cent of its production of sanforized cloth for the period from January 1, 1966 to December 31, 1969, and to pay such sum to the government calculated at the rate of 10 paisa per linear yard on the quantity of sanforized cloth falling short of the quantity undertaken-to be so exported .The assessee company in the calendar year 1967, being the previous year relevant to the assessment year 1968-69, debited in its books an amount of Rs. 18,247 with a view to make provision for payment to the Textile Commissioner for non-fulfilment of the export obligation under taken. This amount was disallowed by the Income Tax Officer as being in the nature of a penalty but the Appellate Assistant Commissioner and the Appellate Tribunal held that the amount of Rs. 18,247 must be allowed as revenue expenditure laid out wholly and exclusively for the purpose of the assessee's business. On a reference at the instance of the Commissioner it was contended for the Commissioner that the payment in question was a penalty or one akin to penalty and was not incurred by the assessee in its character of a trader: Held, that having regard to the terms of the pond, it was optional for the manufacturer to achieve the export target prescribed or to pay to the Government the sum or sums calculated at the rate of ten paisa per linear yard to cover up the shortfall in the export obligation. The…

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